Ontario government's marijuana monopoly could weed out craft growers

Ontario's plan to sell and distribute recreational pot exclusively through a network of government-operated stores could lock in the dominance of the country's large-scale licensed marijuana producers and weed craft growers out of the market, industry experts say.

Two of the country's biggest producers, Aphria Inc. (TSX:APH) and Smiths Falls-based Canopy Growth (TSX:WEED), cheered the province's plan to have the Liquor Control Board of Ontario operate a network of standalone marijuana stores as well become the sole online recreational seller. They also welcomed the government's pledge to stamp out illegal dispensaries, eliminating them as potential competitors.

Canopy Growth president Mark Zekulin said it will take some time for the government's distribution model to scale up, but it and other producers which already sell online can help serve those who don't have an outlet nearby.

However, having fewer independent retailers may hamper smaller marijuana producers in the same way that craft brewers are at a disadvantage at the LCBO, said Dan Sutton, the founder of B.C.-based marijuana producer Tantalus Labs.

"It's feasible that smaller producers will experience more pressure in an environment with less independent retailers."

Aphria's chief executive Vic Neufeld said Ontario's plan – the first province to announce its approach – helped bring some much-needed clarity to the future landscape of the recreational marijuana market.

"Selfishly, I'm really glad to see that the supply chain through the Ontario brick and mortar, and online, is coming from licensed producers across the country," said Neufeld.

However, the Ontario government's plan to become the dominant wholesale customer for recreational marijuana puts a vast amount of power in the hands of one buyer, said Cheryl Reicin, chair of the life sciences group at law firm Torys. That, in turn, will make it harder for smaller producers to compete, she said.

"It's going to put a lot of pricing pressure on the LPs, the licensed producers... It will be interesting to see how many players they deal with," she said.

"Whether it's going to be a whole bunch, or whether the numbers will dwindle."

The federal government has introduced legislation to legalize recreational marijuana by July 2018, but left it up to the provinces and territories to oversee distribution and sales.

Ontario Finance Minister Charles Sousa said the Liberal government has not made any decisions yet on pricing and taxation, as these issue will be discussed in a meeting with the provinces, territories and federal government this fall. It will sell marijuana in as many as 150 dedicated stores by 2020, but will start with 40 in July of next year.

The process of purchasing recreational cannabis will be very similar to the one in place for alcohol at the LCBO, with a minimum age of 19, Attorney General Yasir Naqvi.

But the government's plan to start with only 40 stores in July 2018, when recreational pot is set to be legalized federally, drew criticism for not providing enough access and spurring marijuana users toward illicit sellers.

Jacob Capital Management analyst Khurram Malik says limiting the amount of Ontario residents that have easy access to legal pot will make it harder for the government to shut down the black market and cap the potential for legitimate providers.

Leu Grant, who volunteers at Canna Connoisseurs in Toronto says closing down community dispensaries and asking users to purchase weed from the government isn't in the interest of consumers.

"I think it's very important to think about who this is benefiting," she says. "It's not really for accessibility of people who are sick."

Grant says the regulation prohibiting the public consumption of marijuana signifies that the province isn't prioritizing medicinal users. "A person who needs their medicine, and it happens to be marijuana, why can't they take their medicine in a park?" she says.

"I would like to ask them why we're allowed to smoke toxic cigarettes and drink alcohol in public, but not receive medicine," says Sonya Serafin, another volunteer at Canna Connoisseurs.

Connoisseurs dispenses marijuana only to prescription holders, and Grant says she sees people every day who benefit from the knowledge of the dispensary's staff. Putting experienced workers out of a job and training new employees about marijuana is counterproductive, she says.

"How much does the government really know about growing?" she says. "The people who know the most about the growing, and the plant, and how to care for it, are people who have been criminalized. So now what we're left with is people who don't know anything, in suits, and they're the ones who are benefiting."

Thurley says she would like someone behind the counter who is knowledgeable about marijuana.

"It doesn't make sense to bring in a whole host of new hires and set the system out in such a way that people who actually know about cannabis are excluded from the conversation."

An inferior product could have significant repercussions, Grant says, because dissatisfaction with the government-sanctioned product could fuel more interest in black-market pot.

"If they don't make it cheap enough, then people are still going to be buying on the street."

Sonya Serafin, a volunteer at Canna Connoisseurs

The price of pot could have similar consequences. The government hasn't yet said how they plan to price or tax marijuana. "If they don't make it cheap enough, then people are still going to be buying on the street," says Serafin. "Is this really going to be helping?"

Because only 40 stores in the province will be open by next year, lack of accessibility will also be a deterrent for some users, says Peter Thurley, who uses marijuana to reduce his consumption of opioids, which he was prescribed to help him manage the pain from a burst bowel. If legal weed is both harder and more expensive to purchase, users are more likely to buy illegally.

"Most of (the new stores) will be in the GTA," he says. "Imagine the kid from Huron County. Are they going to travel an hour and a half to Kitchener or London to pick up legal cannabis? Or are they going to go to the dealer that they've always gone to down the street?"

The government has said it will sell marijuana online to people who don't live near major cities, but that's still less convenient than a neighbourhood pot dealer, Thurley says.

He adds he would like to the see the government spend more money on cannabis research than on enforcement.

"There are so many opportunities here for the provincial government to do it right," he says. "I would urge them that there's no shame in pulling back and saying, you know what, we got this wrong."